Is Europe facing its own “Bear Stearns” moment? That was the question hanging over the markets on Wednesday as the sense of uncertainty spread. The AFP reports that three people were killed in a firebomb attack on a bank in central Athens on Wednesday during a demonstration. Twenty others were being evacuated from the building. It’s obvious that the firebombing is the result of the major economic crisis in Greece. People are upset, they fear that their futures, which once seemed so bright, are being taken away from them or at the very least clouded in darkness. This truly is a country on the brink of collapse. We can only wonder what its impact will be on the Euro and, of course, on the European Union as a whole.

"All of us are angry, very, very angry," bellowed Stella Stamou, a civil servant standing on a street corner, screaming herself hoarse, a block away from where the bank had been set alight. "You write that – angry, angry, angry, angry," she said, after participating in one of the biggest ever rallies to rock the capital since the return of democracy in 1974. "Angry with our own politicians, angry with the IMF, angry with the EU, angry that we have lost income, angry that we have never been told the truth.

Across Athens today the signs of that anger were everywhere: in the central boulevards and squares that resembled a war zone, the burning cars, the burning hotels, the burning government buildings and rubbish bins and shattered windows and pavements. What had started as a general strike called by unions to protest against deeply unpopular austerity measures turned into a tidal wave of fury as an estimated 100,000 private and public sector workers took to the streets screaming "let the plutocracy pay".

"Why should we, the little man, pay for this crisis?" said Giorgos Didimopoulos. "What people forget is that we Greeks don't like authority. We have always resisted when we think something is unfair. We fought against the Persians at Marathon, the Germans during the second world war and we will fight the IMF because in reality we no longer have a government. It is foreign forces who are in charge of us now."

Greek Default Already Decided


The real decision made by euro-zone authorities last Sunday was not to save Greece, but to escort it to a safe house where the country’s massive debt can be cut down to size through a painful restructuring.

That’s the view of Willem Buiter, a former member of the Bank of England’s Monetary Policy Committee and frequent consultant to the European Central Bank, who recently joined Citigroup as it’s chief economist. He’s not making a prediction. He’s saying the decision has already been made.

In a note distributed Wednesday he said: “A Greek sovereign restructuring with a net present discounted value haircut became unavoidable when the euro area decided not to lend to Greece at something close to the risk-free rate, but at 300 or 400 basis points over the swap rate.”


The  final  €110 billion rescue package is full of feints. One is that the tough conditionality clauses require Greece to make swingeing fiscal cuts, so that it is running a primary budget surplus in 2013, by which time its gross sovereign debt will have risen to around 150% of GDP.


The hopeful rhetoric is that Greece might be able to tap markets at a 5% yield, roughly the marginal term of the rescue package.


But even if Greece could issue bonds at 5% in 2013, it would still have to pay 7% of GDP just to pay interest on its debt, a level that spells perpetual stagnation or would require a massive boom in global demand for ouzo and feta cheese.


Buiter says that describing Greek debt levels as having been “stabilized at that level is disingenuous”.


A mix of huge debt and no primary deficit - i.e. needs for external funds to pay for ongoing government spending - constitute “ the exact circumstances that makes a default individually rational for the debtor,” he notes.


But his main point is that markets will price in that default risk. This means that, when the bailout package expires at the end of 2012, it will have to be rolled over again, as Greece still won’t be able to obtain feasible borrowing costs.


So, even though the roughly 5% rate in the rescue package is strongly subsidized compared to the market, the euro-zone authorities that decided upon it basically decided then and there that Greece’s sovereign debt will be restructured.


The later it happens, the larger the haircut will be, says Buiter. He reckons a 30% cut today would have sufficed, but would have wrought havoc on the capital positions of Greek, French and German commercial banks, which would probably need to be recapitalized immediately, provoking major political embarrassment in Berlin and Paris.


Instead, Buiter says, the plan must be to give some time to those banks to recapitalize, or sneak Greek exposure off private balance sheets and on to public ones.


Expect an announcement in 2011, he suggests.


May 5, 2010, The Wall Street Journal